Borrowing a rental deposit can add thousands to tenant costs

January 3, 2020

Research by Hamilton Fraser’s deposit alternative scheme Ome, has looked at the real cost of a tenancy deposit for those that have to borrow the money in order to overcome the initial financial hurdle of renting.

For many, the average tenant deposit cost of £1,299 is manageable but the issue is the requirement to pay the full sum upfront, leading many to turn to family for a loan. But for many more, this isn’t a possibility and so they are forced to borrow the money from a lender and stomach the additional interest on top of the deposit itself.

Ome looked at the additional costs of a credit card, personal loan and payday loan and found that the interest ranged between £44 to £2,794 depending on rate and credit score over a year long term.

Credit card

Using a credit card with a low rate of interest is the most cost-effective way to borrow a rental deposit and at an average rate of 6.4% it would set you back £112 a month to pay back over 12 months, with £44 in interest.

A medium rate at an average of 18.9% would set you back £119 a month with £126 paid in interest, while a higher rate at 36.3% would come in at a monthly cost of £128, paying £231 in interest.

Personal loan

If you have a good credit score, a personal loan at a rate 11.4% would cost £115 per month with just £78 in interest, the second most affordable route to borrow a rental deposit.

An average credit score would cost you £118 a month at a rate of 16.7% paying £112 in interest, but a poor credit score would cost around £122 a month, paying £163 in interest. For those with medium to poor credit scores, a credit card, while still fairly expensive, would see you pay less interest in the long run.

Payday loans

Notorious for their high rates of interest and by far the worst route to go down when borrowing a tenancy deposit but unfortunately the only route for some. Borrowing £1,299 and paying it back over the course of a year would see you hit with a rate of 292%, paying a hefty £341 a month and a huge lump of interest at £2,784.

Co-founder of Ome, Matthew Hooker, commented:

“For many tenants, the financial hurdle of a deposit is more of a cash flow problem than an affordability issue and as a result, many are forced to borrow the money in order to secure a rental property.

This only adds to the financial stress that renting can bring and with rents continuing to climb, not only are tenants paying a large sum to a landlord each month, but also to their lender with the addition of interest.

This is particularly testing for those with a poor credit score who have no choice but to borrow with some very high-interest rates and of course, should they borrow for a longer-term, they will also pay more in interest.

This large upfront obstacle in the way of a tenant deposit is one of the driving reasons we launched Ome in order to address the issue of cash flow for the UK.”

Cost of borrowing average deposit and payback over a year
Type
Average representative rate – interest rate – APR
Amount to borrow (average deposit)
Loan term / period
Monthly cost
Overall cost (with interest) / amount repayable
Interest Paid
Sources
Credit card – Low rate
6.4%
£1,299
1 year
£112
£1,343
£44
Credit card – Medium rate
18.9%
£1,299
1 year
£119
£1,425
£126
Credit card – High rate
36.3%
£1,299
1 year
£128
£1,530
£231
Payday loan – average rate
292%
£1,299
1 year
£341
£4,093
£2,794
Personal loan – low rate (good credit score)
11.4%
£1,299
1 year
£115
£1,377
£78
Personal loan – medium rate (average credit score)
16.7%
£1,299
1 year
£118
£1,411
£112
Personal loan – high rate (poor credit score)
24.9%
£1,299
1 year
£122
£1,462
£163

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